Do investors see a multi-billion-dollar idea in disappearing photos, text messages and videos? Apparently so after one Silicon Valley investment firm valued the social media application Snapchat at $10 billion when it provided the latest round of funding.
Although the social networking app is barely generating any revenues and is not yet profitable, venture capital firm Kleiner Perkins Caulfield & Byers invested $20 million in Snapchat, which has joined the $10 billion valuation faction, a lucrative club of tech titans that consists of Uber, Dropbox and Airbnb – Palantlr is on the cusp with $9.3 billion.
Until this week, Snapchat had raised $163 million in five rounds of funding from seven investors. This means that the company doesnt need to focus on producing revenues to stay afloat as it can instead use its resources to grow its userbase filled with pre-teens, teenagers and young adults.
Founded in 2011 by two United States university students, Snapchat allows users to communicate with each other by sending photos that automatically delete themselves after only a few seconds. It currently handles 500 million messages each day and maintains an estimated 27 million users as of Jun. 2014, up from 11 million the same time a year ago.
Within just a few years, the simple concept has started to compete with other established media apps, including Instagram and WhatsApp. Last year, the social media app surprised investors when it declined a $3 billion acquisition offer from Facebook. The company CEO, Evan Spiegel, told newspapers that short-term trading isnt necessarily an interesting endeavor.
Ian Maude of research firm Enders Analysis told BBC News that the recent valuation places Snapchat in Facebook and Twitter territory, but noted that the aforementioned companies are creating an abundance of revenues while Snapchat isnt drawing a dime.
The bet investors are making is that it is going to be worth the amount of Facebook and Twitter one day. If you have got an audience, you can develop a substantial multibillion-dollar business, explained Maude.
Snapchat has definitely gained an audience. It was reported earlier this month that Snapchat is now the third most popular social app among millennials – individuals aged between 18 and 34 – and the app now enjoys one-third penetration of these users smartphones, which is only behind Facebook and Instagram.
In other words, Snapchat is becoming increasingly more popular for millennials than Twitter, Pinterest, Google+, Vine and Tumblr. This data may suggest why Snapchat declined the offer as its long-term focus is on the millennial generation, a tech-savvy group that embraces social media in every facet of life.
Of course, this also translates to marketability. Advertisers have been highly interested in Snapchat for quite some time now because the younger generation has transformed into big consumers of both shopping and content.
Snapchat is expanding its services. Called Snapchat Discovery, users can view news articles, television clips, movie trailers and advertisements through the new app. Akin to its initial business model, this content vanishes after a few seconds. The Wall Street Journal is reporting that Snapchat is in talks with at least a dozen media companies involved in magazines, newspapers and television networks.